MediaCo Holding's (NASDAQ:MDIA) Returns On Capital Tell Us There Is Reason To Feel Uneasy

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at MediaCo Holding (NASDAQ:MDIA), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on MediaCo Holding is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.039 = US$5.3m ÷ (US$152m - US$18m) (Based on the trailing twelve months to September 2021).

So, MediaCo Holding has an ROCE of 3.9%. In absolute terms, that's a low return and it also under-performs the Media industry average of 8.4%.

View our latest analysis for MediaCo Holding

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how MediaCo Holding has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at MediaCo Holding. Unfortunately the returns on capital have diminished from the 5.5% that they were earning two years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last two years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on MediaCo Holding becoming one if things continue as they have.

What We Can Learn From MediaCo Holding's ROCE

In summary, it's unfortunate that MediaCo Holding is generating lower returns from the same amount of capital. Since the stock has skyrocketed 103% over the last year, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 4 warning signs for MediaCo Holding you'll probably want to know about.

While MediaCo Holding may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.